Every April, our country rides a rollercoaster that starts with April Fool’s Day (“No taxes this year!”), soars through Income Tax Day (“Just kidding. They are due today.”), thrills us with Tax Refund Day (“Yay!”), and ends with that most stressful of family holidays–Arbor Day.
Of course, your tax refund isn’t free money. It’s money that you’ve overpaid to the government all year, which you now get back all in one lump sum. It’s tempting to splurge on big purchases like that Hutzler 571 banana slicer you’ve been thinking about all year (read the reviews), but it’s also a great opportunity to lay another golden brick down on your path to retirement.
If you’ve read our article about stock market returns, then you know how important investing early is to building wealth. For example, if your goal is to retire at age 65 with $1,000,000, and you start at age 45, you’ll need to invest about $16,500 per year, assuming you get the stock market’s historical rate of return around 9.8%. On the other hand, if you start at age 25, you need to invest only about $2,200 per year. There are, of course, no guarantees when it comes to annual returns — they could be higher or lower than 9.8% in any given year.
Do a favor for your future self and invest your tax refund now. Our guess is you won’t regret passing up the banana slicer.